Better than expected first quarter results have brought cheer to the Indian stock markets. A prima facie analysis of the overall financial performance of India Inc. may have been enough to convince the bulls that the Indian economy is finally out of the 'Recession blues'. However, the quarterly results of a few companies are a result of some financial jugglery, and thus should be taken with a pinch of salt. As per the notification issued by Ministry of Corporate affairs (MCA) in April 2009, provisions of AS11 have been suspended for a period of 2 years effective March 2009. As per AS11 companies are required to mark to market (MTM) their Forex assets and book gains/ losses in their Profit & Loss account on QOQ basis.
Taking advantage of this notification, quite a few companies have changed their accounting policies w.e.f June'09 quarter thus increasing their profits. For example, Tata Motors reported a net profit of Rs.514 cr. for quarter June'09, which reflects an increase of 57% over corresponding quarter last year, despite a drop of 8% in its sales. A foot note to the results says that last year profit would have been Rs.502 cr. as per the amended AS11. Another company Moser Baer has reported a net profit of Rs.43 cr., which is higher by Rs.146 cr. due to the amendment in AS11. In real terms the company would have suffered a loss of Rs.103 cr.
These are just two examples of accounting jugglery. Many more companies would have resorted to such accounting practices to boost their bottom line. But this makes comparison of company results a much more complex affair. Investors must take cognizance of the foot notes in the company balance sheet before taking a decision to invest, rather than being taken for a ride!
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